ex10_4.htm


     

    
      SECURITY
AGREEMENT

       

      THIS SECURITY AGREEMENT (the
“Agreement”), is entered into and made
effective as of June 30, 2008, by and between Environment Ecology Holding Co. of
China a Florida corporation, with headquarters located at 391 Hun Yu
Lane, Dong Xin Street, Xi’an, Shaanxi Province, P.R. China (the “Company”), and Trafalgar Capital Specialized
Investment Fund, Luxembourg (the “Secured
Party”).  Capitalized words which are otherwise undefined in
this Agreement shall have the same definition as in the Securities Purchase
Agreement entered into by the parties hereto on the date hereof.

       

      WHEREAS, the Company shall
issue and sell to the Secured Party, as provided in the Securities Purchase
Agreement dated the date hereof, and the Secured Party shall purchase up to Six
Million U.S. Dollars ($6,000,000) of secured convertible redeemable
debentures (the “Debentures”) in the
respective amounts set forth opposite each Buyer(s) name on Schedule I
attached to the Securities Purchase Agreement;

       

      WHEREAS, to induce the Secured
Party to enter into the transaction contemplated by the Securities Purchase
Agreement, the Debentures, the Registration Rights Agreement and the Escrow
Agreement (collectively referred to as the “Transaction
Documents”), the Company hereby grants to the Secured Party a first
priority security interest in and to the pledged property identified on Exhibit “A” hereto
(collectively referred to as the “Pledged Property”)
until the satisfaction of the Obligations, as defined herein below.

       

      NOW, THEREFORE, in
consideration of the premises and the mutual covenants herein contained, and for
other good and valuable consideration, the adequacy and receipt of which are
hereby acknowledged, the parties hereto hereby agree as follows:

       

      ARTICLE
1.

       

      DEFINITIONS AND
INTERPRETATIONS

       

      
        	
                Section
      1.1.

              	
                Recitals.

              


      

       

      The above
recitals are true and correct and are incorporated herein, in their entirety, by
this reference.

       

      
        	
                Section
      1.2.

              	
                Interpretations.

              


      

       

      Nothing
herein expressed or implied is intended or shall be construed to confer upon any
person other than the Secured Party any right, remedy or claim under or by
reason hereof.

       

      
        	
                Section
      1.3.

              	
                Obligations
      Secured.

              


      

       

      The
obligations secured hereby are any and all obligations of the Company to the
Secured Party now existing or hereinafter incurred to the Secured Party, whether
oral or written and whether arising before, on or after the date hereof
including, without limitation, those obligations of the Company to the Secured
Party under the Securities Purchase Agreement and the Debenture and any other
amounts now or hereafter owed to the Secured Party by the Company thereunder or
hereunder (collectively, the “Obligations”).

       

      ARTICLE
2.

       

      PLEDGED PROPERTY,
ADMINISTRATION OF COLLATERAL

       

       

      AND TERMINATION OF SECURITY
INTEREST

       

      
        	
                Section
      2.1.

              	
                Grant of Security
      Interest.

              


      

       

      1.           Company
hereby pledges to the Secured Party and creates in the Secured Party for its
benefit a security interest for such time until the Obligations are paid in
full, in and to all of in the property described in “Exhibit A” hereto,
whether now existing or hereafter from time to time acquired (collectively,
the  “Pledged
Property.”).

       

      (a)           Simultaneously
with the execution and delivery of this Agreement, the Company shall make,
execute, acknowledge, file, record and deliver to the Secured Party any
documents reasonably requested by the Secured Party to perfect its security
interest in the Pledged Property.  Simultaneously with the execution
and delivery of this Agreement, the Company shall make, execute, acknowledge and
deliver to the Secured Party such documents and instruments, including, without
limitation, financing statements, certificates, affidavits and forms as may, in
the Secured Party’s reasonable judgment, be necessary to effectuate, complete or
perfect, or to continue and preserve, the security interest of the Secured Party
in the Pledged Property, and the Secured Party shall hold such documents and
instruments as secured party, subject to the terms and conditions contained
herein.

       

      
        	
                Section
      2.2.

              	
                Rights; Interests;
      Etc.

              


      

       

      (a)           So
long as no Event of Default (as hereinafter defined) shall have occurred
and be continuing:

       

      (i)           the
Company shall be entitled to exercise any and all rights pertaining to the
Pledged Property or any part thereof for any purpose not inconsistent with the
terms hereof; and

       

      (ii)           the
Company shall be entitled to receive and retain any and all payments paid or
made in respect of the Pledged Property.

       

      (b)           Upon
the occurrence and during the continuance of an Event of Default:

       

      (i)           All
rights of the Company to exercise the rights which it would otherwise be
entitled to exercise pursuant to Section 2.2(a)(i) hereof and to
receive payments which it would otherwise be authorized to receive and retain
pursuant to Section 2.2(a)(ii) hereof shall be suspended, and all such
rights shall thereupon become vested in the Secured Party who shall thereupon
have the sole right to exercise such rights and to receive and hold as Pledged
Property such payments; provided, however, that if
the Secured Party shall become entitled and shall elect to exercise its right to
realize on the Pledged Property pursuant to Article 5 hereof, then all cash
sums received by the Secured Party, or held by Company for the benefit of the
Secured Party and paid over pursuant to Section 2.2(b)(ii) hereof,
shall be applied against any outstanding Obligations; and

       

      (ii)           All
interest, dividends, income and other payments and distributions which are
received by the Company contrary to the provisions of
Section 2.2(b)(i) hereof shall be received in trust for the benefit of
the Secured Party, shall be segregated from other property of the Company and
shall be forthwith paid over to the Secured Party; or

       

      (iii)           The
Secured Party in its sole discretion shall be authorized to sell any or all of
the Pledged Property at public or private sale in order to recoup all of the
outstanding principal plus accrued interest owed pursuant to the Debenture as
described herein

       

      (c)           Each
of the following events, subject to the lapse of applicable cure periods, shall
constitute a default under this Agreement (each an “Event of
Default”):

       

      (i)           any
default, whether in whole or in part, shall occur in the payment to the Secured
Party of principal, interest or other item comprising the Obligations as and
when due or with respect to any other debt or obligation of the Company to a
party other than the Secured Party;

       

      (ii)           any
default, whether in whole or in part, shall occur in the due observance or
performance of any obligations or other covenants, terms or provisions to be
performed under this Agreement or the Transaction Documents;

       

      (iii)           the
Company shall:  (1) make a general assignment for the benefit of
its creditors; (2) apply for or consent to the appointment of a receiver,
trustee, assignee, custodian, sequestrator, liquidator or similar official for
itself or any of its assets and properties; (3) commence a voluntary case
for relief as a debtor under the United States Bankruptcy Code; (4) file
with or otherwise submit to any governmental authority any petition, answer or
other document seeking:  (A) reorganization, (B) an
arrangement with creditors or (C) to take advantage of any other present or
future applicable law respecting bankruptcy, reorganization, insolvency,
readjustment of debts, relief of debtors, dissolution or liquidation;
(5) file or otherwise submit any answer or other document admitting or
failing to contest the material allegations of a petition or other document
filed or otherwise submitted against it in any of the proceedings set forth in
this Section 2.2(c)(iii) under any such applicable law, or (6) be
adjudicated a bankrupt or insolvent by a court of competent jurisdiction;
or

       

      (iv)           any
case, proceeding or other action shall be commenced against the Company for the
purpose of effecting, or an order, judgment or decree shall be entered by any
court of competent jurisdiction approving (in whole or in part) anything
specified in Section 2.2(c)(iii) hereof, or any receiver, trustee,
assignee, custodian, sequestrator, liquidator or other official shall be
appointed with respect to the Company, or shall be appointed to take or shall
otherwise acquire possession or control of all or a substantial part of the
assets and properties of the Company, and any of the foregoing shall continue
unstayed and in effect for any period of thirty (30) days.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      ARTICLE
3.

       

      ATTORNEY-IN-FACT;
PERFORMANCE

       

      
        	
                Section
      3.1.

              	
                Secured Party
      Appointed Attorney-In-Fact.

              


      

       

      Upon the
occurrence of an Event of Default, the Company hereby appoints the Secured Party
as its attorney-in-fact, with full authority in the place and stead of the
Company and in the name of the Company or otherwise, from time to time in the
Secured Party’s discretion to take any action and to execute any instrument
which the Secured Party may reasonably deem necessary to accomplish the purposes
of this Agreement, including, without limitation, to receive and collect all
instruments made payable to the Company representing any payments in respect of
the Pledged Property or any part thereof and to give full discharge for the
same.  The Secured Party may demand, collect, receipt for, settle,
compromise, adjust, sue for, foreclose, or realize on the Pledged Property as
and when the Secured Party may determine.  To facilitate collection,
the Secured Party may notify account debtors and obligors on any Pledged
Property or Pledged Property to make payments directly to the Secured
Party.

       

      
        	
                Section
      3.2.

              	
                Secured Party May
      Perform.

              


      

       

      If the
Company fails to perform any agreement contained herein, the Secured Party, at
its option, may itself perform, or cause performance of, such agreement, and the
expenses of the Secured Party incurred in connection therewith shall be included
in the Obligations secured hereby and payable by the Company under
Section 8.3.

       

      ARTICLE
4.

       

      REPRESENTATIONS AND
WARRANTIES

       

      
        	
                Section
      4.1.

              	
                Authorization;
      Enforceability.

              


      

       

      Each of
the parties hereto represents and warrants that it has taken all action
necessary to authorize the execution, delivery and performance of this Agreement
and the transactions contemplated hereby; and upon execution and delivery, this
Agreement shall constitute a valid and binding obligation of the respective
party, subject to applicable bankruptcy, insolvency, reorganization, moratorium
and similar laws affecting creditors’ rights or by the principles governing the
availability of equitable remedies.

       

      
        	
                Section
      4.2.

              	
                Ownership of Pledged
      Property.

              


      

       

      The
Company warrants and represents that it is the legal and beneficial owner of the
Pledged Property free and clear of any lien, security interest, option or other
charge or encumbrance except for the security interest created by this Agreement
and for the Permitted Liens.  For purposes hereof, “Permitted Liens”
shall mean (i) liens for taxes or other governmental charges which are not yet
delinquent or are being contested in good faith by appropriate proceedings, (ii)
liens for carriers, contractors, warehousemen, mechanics, materialmen, laborers,
employees, suppliers or other similar persons arising by operation of law and
incurred in the ordinary course of business for sums not yet delinquent or being
contested in good faith, (iii) liens relating to deposits made in the ordinary
course of business in connection with workers’ compensation, unemployment
insurance and other types of social security or to secure the performance of
leases, trade contracts or other similar agreements; and (iv) in the case of
real property, any matters, restrictions, covenants, conditions, limitations,
rights, rights of way, encumbrances, encroachments, reservations, easements,
agreements and other matters of record, such state of facts of which an accurate
survey or inspection of the property would reveal and do not materially
interfere with the use or value of the property.

       

      ARTICLE
5.

       

      DEFAULT; REMEDIES;
SUBSTITUTE COLLATERAL

       

      
        	
                Section
      5.1.

              	
                Default and
      Remedies.

              


      

       

      (a)           If
an Event of Default described in Section 2.2(c)(i) or
(ii) occurs, then in each such case the Secured Party may declare the
Obligations to be due and payable immediately, by a notice in writing to the
Company, and upon any such declaration, the Obligations shall become immediately
due and payable.  If an Event of Default described in
Sections 2.2(c)(iii) or (iv) occurs and is continuing for the
period set forth therein, then the Obligations shall automatically become
immediately due and payable without declaration or other act on the part of the
Secured Party.

       

      (b)           Upon
the occurrence of an Event of Default, the Secured Party shall: (i) be
entitled to receive all distributions with respect to the Pledged Collateral,
(ii) to cause the Pledged Property to be transferred into the name of the
Secured Party or its nominee, (iii) to dispose of the Pledged Property, and
(iv) to realize upon any and all rights in the Pledged Property then held
by the Secured Party as provided herein.

       

      
        	
                Section
      5.2.

              	
                Method of Realizing
      Upon the Pledged Property: Other
  Remedies.

              


      

       

      Upon the
occurrence of an Event of Default, in addition to any rights and remedies
available at law or in equity, the following provisions shall govern the Secured
Party’s right to realize upon the Pledged Property:

       

      (a)           Any
item of the Pledged Property may be sold for cash or other value in any number
of lots at brokers board, public auction or private sale and may be sold without
demand, advertisement or notice (except that the Secured Party shall give the
Company ten (10) days’ prior written notice of the time and place or
of the time after which a private sale may be made (the “Sale Notice”)), which
notice period is hereby agreed to be commercially reasonable.  At any
sale or sales of the Pledged Property, the Company may bid for and purchase the
whole or any part of the Pledged Property and, upon compliance with the terms of
such sale, may hold, exploit and dispose of the same without further
accountability to the Secured Party.  The Company will execute and
deliver, or cause to be executed and delivered, such instruments, documents,
assignments, waivers, certificates, and affidavits and supply or cause to be
supplied such further information and take such further action as the Secured
Party reasonably shall require in connection with any such sale.

       

      (b)           Any
cash being held by the Secured Party as Pledged Property and all cash proceeds
received by the Secured Party in respect of, sale of, collection from, or other
realization upon all or any part of the Pledged Property shall be applied as
follows:

       

      (i)           to
the payment of all amounts due the Secured Party for the expenses reimbursable
to it hereunder or owed to it pursuant to Section 8.3 hereof;

       

      (ii)           to
the payment of the Obligations then due and unpaid.

       

      (iii)           the
balance, if any, to the person or persons entitled thereto, including, without
limitation, the Company.

       

      (c)           In
addition to all of the rights and remedies which the Secured Party may have
pursuant to this Agreement, the Secured Party shall have all of the rights and
remedies provided by law, including, without limitation, those under the Uniform
Commercial Code.

       

      (d)           If
the Company fails to pay such amounts due upon the occurrence of an Event of
Default which is continuing, then the Secured Party may institute a judicial
proceeding for the collection of the sums so due and unpaid, may prosecute such
proceeding to judgment or final decree and may enforce the same against the
Company and collect the monies adjudged or decreed to be payable in the manner
provided by law out of the property of Company, wherever situated.

       

      (e)           The
Company agrees that it shall be liable for any reasonable fees, expenses and
costs incurred by the Secured Party in connection with enforcement, collection
and preservation of the Transaction Documents, including, without limitation,
reasonable legal fees and expenses, and such amounts shall be deemed included as
Obligations secured hereby and payable as set forth in Section 8.3
hereof.

       

      
        	
                Section
      5.3.

              	
                Proofs of
      Claim.

              


      

       

      In case
of the pendency of any receivership, insolvency, liquidation, bankruptcy,
reorganization, arrangement, adjustment, composition or other judicial
proceeding relating to the Company or the property of the Company or of such
other obligor or its creditors, the Secured Party (irrespective of whether the
Obligations shall then be due and payable as therein expressed or by declaration
or otherwise and irrespective of whether the Secured Party shall have made any
demand on the Company for the payment of the Obligations), shall be entitled and
empowered, by intervention in such proceeding or otherwise:

       

      (i)           to
file and prove a claim for the whole amount of the Obligations and to file such
other papers or documents as may be necessary or advisable in order to have the
claims of the Secured Party (including any claim for the reasonable legal fees
and expenses and other expenses paid or incurred by the Secured Party permitted
hereunder and of the Secured Party allowed in such judicial proceeding),
and

       

      (ii)           to
collect and receive any monies or other property payable or deliverable on any
such claims and to distribute the same; and any custodian, receiver, assignee,
trustee, liquidator, sequestrator or other similar official in any such judicial
proceeding is hereby authorized by the Secured Party to make such payments to
the Secured Party and, in the event that the Secured Party shall consent to the
making of such payments directed to the Secured Party, to pay to the Secured
Party any amounts for expenses due it hereunder.

       

      
        	
                Section
      5.4.

              	
                Duties Regarding
      Pledged Property.

              


      

       

      The
Secured Party shall have no duty as to the collection or protection of the
Pledged Property or any income thereon or as to the preservation of any rights
pertaining thereto, beyond the safe custody and reasonable care of any of the
Pledged Property actually in the Secured Party’s possession.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      ARTICLE
6.

       

      AFFIRMATIVE
COVENANTS

       

      The
Company covenants and agrees that, from the date hereof and until the
Obligations have been fully paid and satisfied, unless the Secured Party shall
consent otherwise in writing (as provided in Section 8.4
hereof):

       

      
        	
                Section
      6.1.

              	
                Existence, Properties,
      Etc.

              


      

       

      (a)           The
Company shall do, or cause to be done, all things, or proceed with due diligence
with any actions or courses of action, that may be reasonably necessary
(i) to maintain Company’s due organization, valid existence and good
standing under the laws of its state of incorporation, and (ii) to preserve
and keep in full force and effect all qualifications, licenses and registrations
in those jurisdictions in which the failure to do so could have a Material
Adverse Effect (as defined below); and (b) the Company shall not do, or
cause to be done, any act impairing the Company’s corporate power or authority
(i) to carry on the Company’s business as now conducted, and (ii) to
execute or deliver this Agreement or any other document delivered in connection
herewith, including, without limitation, any UCC-1 Financing Statements required
by the Secured Party to which it is or will be a party, or perform any of
its obligations hereunder or thereunder.  For purpose of this
Agreement, the term “Material Adverse
Effect” shall mean any material and adverse affect, whether individually
or in the aggregate, upon (a) the Company’s assets, business, operations,
properties or condition, financial or otherwise or results of operations of the
Company, taken as a whole, excluding any change, event, circumstance or effect
that is caused by changes in general economic conditions or changes generally
affecting the industry in which the Company operates (provided that such changes
do not affect the Company in a materially disproportionate manner); or
(b) the Company’s ability to make payment as and when due of all or any
part of the Obligations; or (c) the Pledged Property.

       

      
        	
                Section
      6.2

              	
                Accounts and
      Reports.

              


      

       

      The
Company shall maintain a standard system of accounting in accordance with
generally accepted accounting principles consistently applied and provide, at
its sole expense, to the Secured Party the following:

       

      (b)           as
soon as available, a copy of any notice or other communication alleging any
nonpayment or other material breach or default, or any foreclosure or other
action respecting any material portion of its assets and properties, received
respecting any of the indebtedness of the Company in excess of $25,000 (other
than the Obligations), or any demand or other request for payment under any
guaranty, assumption, purchase agreement or similar agreement or arrangement
respecting the indebtedness or obligations of others in excess of $25,000,
including any received from any person acting on behalf of the Secured Party or
beneficiary thereof, except for supplier requests in the normal course of
business for payment of past due accounts payable invoices so long as such past
due amounts do not exceed in the aggregate $50,000 at any time; and

       

      (c)           within
fifteen (15) days after the making of each submission or filing, a copy of
any report, financial statement, notice or other document, whether periodic or
otherwise, submitted to the shareholders of the Company, or submitted to or
filed by the Company with any governmental authority involving or affecting (i)
the Company that could have a Material Adverse Effect; (ii) the
Obligations; or (iii) any part of the Pledged Property.

       

      
        	
                Section
      6.2.

              	
                Maintenance of Books
      and Records; Inspection.

              


      

       

      The
Company shall maintain its books, accounts and records in accordance with United
States generally accepted accounting principles consistently applied, and permit
the Secured Party, its officers and employees and any professionals designated
by the Secured Party in writing, during business hours and upon reasonable
notice to visit and inspect any of its properties (including but not limited to
the Pledged Property), corporate books and financial records, and to discuss its
accounts, affairs and finances with any employee, officer or director
thereof.

       

      
        	
                Section
      6.3.

              	
                Maintenance and
      Insurance.

              


      

       

      (a)           The
Company shall maintain or cause to be maintained, at its own expense, all of its
assets and properties in good working order and condition, making all necessary
repairs thereto and renewals and replacements thereof.

       

      (b)           The
Company shall maintain or cause to be maintained, at its own expense, insurance
in form, substance and amounts (including deductibles), which the Company deems
reasonably necessary to the Company’s business, (i) adequate to insure all
assets and properties of the Company, which assets and properties are of a
character usually insured by persons engaged in the same or similar business
against loss or damage resulting from fire or other risks included in an
extended coverage policy; (ii) against public liability and other tort
claims that may be incurred by the Company; (iii) as may be required by the
Transaction Documents and/or applicable law and (iv) as may be reasonably
requested by Secured Party, all with adequate, financially sound and reputable
insurers.

       

      
        	
                Section
      6.4.

              	
                Contracts and Other
      Collateral.

              


      

       

      The
Company shall perform all of its obligations under or with respect to each
instrument, receivable, contract and other intangible included in the Pledged
Property to which the Company is now or hereafter will be party on a timely
basis and in the manner therein required, including, without limitation, this
Agreement.

       

      
        	
                Section
      6.5.

              	
                Defense of Collateral,
      Etc.

              


      

       

      The
Company shall defend and enforce its right, title and interest in and to any
part of:  (a) the Pledged Property; and (b) if not included
within the Pledged Property, those assets and properties whose loss could have a
Material Adverse Effect, the Company shall defend the Secured Party’s right,
title and interest in and to each and every part of the Pledged Property, each
against all manner of claims and demands on a timely basis to the full extent
permitted by applicable law.

       

      
        	
                Section
      6.6.

              	
                Payment of Debts,
      Taxes, Etc.

              


      

       

      The
Company shall pay, or cause to be paid, all of its indebtedness and other
liabilities and perform, or cause to be performed, all of its obligations in
accordance with the respective terms thereof, and pay and discharge, or cause to
be paid or discharged, all taxes, assessments and other governmental charges and
levies imposed upon it (other than those being contested by the Company in good
faith), upon any of its assets and properties on or before the last day on which
the same may be paid without penalty, as well as pay all other lawful claims
(whether for services, labor, materials, supplies or otherwise) as and when
due

       

      
        	
                Section
      6.7.

              	
                Taxes and Assessments;
      Tax Indemnity.

              


      

       

      The
Company shall (a) file all tax returns and appropriate schedules thereto
that are required to be filed under applicable law, prior to the date of
delinquency, (b) pay and discharge all taxes, assessments and governmental
charges or levies imposed upon the Company, upon its income and profits or upon
any properties belonging to it, prior to the date on which penalties attach
thereto, and (c) pay all taxes, assessments and governmental charges or
levies that, if unpaid, might become a lien or charge upon any of its
properties; provided,
however, that the Company in good faith may contest any such tax,
assessment, governmental charge or levy described in the foregoing clauses (b)
and (c) so long as appropriate reserves are maintained with respect
thereto.

       

      
        	
                Section
      6.8.

              	
                Compliance with Law
      and Other Agreements.

              


      

       

      The
Company shall maintain its business operations and property owned or used in
connection therewith in compliance with (a) all applicable federal, state
and local laws, regulations and ordinances governing such business operations
and the use and ownership of such property, and (b) all agreements,
licenses, franchises, indentures and mortgages to which the Company is a party
or by which the Company or any of its properties is bound.  Without
limiting the foregoing, the Company shall pay all of its indebtedness promptly
in accordance with the terms thereof.

       

      
        	
                Section
      6.9.

              	
                Notice of
      Default.

              


      

       

      The
Company shall give written notice to the Secured Party of the occurrence of any
default or Event of Default under this Agreement or the Transaction Documents,
promptly upon the occurrence thereof.

       

      
        	
                Section
      6.10.

              	
                Notice of
      Litigation.

              


      

       

      The
Company shall give notice, in writing, to the Secured Party of (a) any
actions, suits or proceedings wherein the amount at issue is in excess of
$50,000, instituted by any persons against the Company, or affecting any of the
assets of the Company, and (b) any dispute, not resolved within fifteen
(15) days of the commencement thereof, between the Company on the one hand and
any governmental or regulatory body on the other hand, which might reasonably be
expected to have a Material Adverse Effect on the business operations or
financial condition of the Company.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      ARTICLE
7.

       

      NEGATIVE
COVENANTS

       

      The
Company covenants and agrees that, from the date hereof until the Obligations
have been fully paid and satisfied, the Company shall not, unless the Secured
Party shall consent otherwise in writing:

       

      
        	
                Section
      7.1.

              	
                Indebtedness.

              


      

       

      Other
than in the ordinary course of business consistent with past practice or as
otherwise permitted herein, without the prior written consent of the Secured
Party, the Company shall not directly or indirectly permit, create, incur,
assume, permit to exist, increase, renew or extend on or after the date hereof
any indebtedness on its part, including commitments, contingencies and credit
availabilities, or apply for or offer or agree to do any of the foregoing unless
any security interest on such indebtedness is junior to the security interest
held by the Secured Party hereunder.

       

      
        	
                Section
      7.2.

              	
                Liens and
      Encumbrances.

              


      

       

      Except
for Permitted Liens and for transfers in the ordinary course of
business,  and except for such assignment, transfer, pledge, mortgage,
security interest or other lien or encumbrance as is outstanding on the date of
this Agreement, the Company shall not directly or indirectly make, create,
incur, assume or permit to exist any assignment, transfer, pledge, mortgage,
security interest or other lien or encumbrance of any nature in, to or against
any part of the Pledged Property or of the Company’s capital stock, or offer or
agree to do so, or own or acquire or agree to acquire any asset or property of
any character subject to any of the foregoing encumbrances (including any
conditional sale contract or other title retention agreement), or assign, pledge
or in any way transfer or encumber its right to receive any income or other
distribution or proceeds from any part of the Pledged Property; or enter into
any sale-leaseback financing respecting any part of the Pledged Property as
lessee, or cause or assist the inception or continuation of any of the
foregoing.

       

      
        	
                Section
      7.3.

              	
                Certificate of
      Incorporation, By-Laws, Mergers, Consolidations, Acquisitions and Sales,
      Sales of Capital Stock, Incurrence of
  Debt.

              


      

       

      Other
than in the ordinary course of business, without the prior express written
consent of the Secured Party, the Company shall not:  (a) Amend
its Articles of Incorporation or By-Laws; (b) issue or sell its common stock
without consideration or for a consideration per share less than the bid price
of the common stock determined immediately prior to its issuance, (c) issue or
sell shares of Common Stock or Preferred Stock without consideration or for a
consideration per share less than the bid price of the Common Stock determined
immediately prior to its issuance provided that upon such sale with Secured
Party’s consent, the Fixed Conversion Price in the Debentures shall be reset to
an amount equal to eighty-five percent of such sales price (the “Reset Price”)
if such Reset Price would be lower than the then current Fixed Conversion Price,
(d) issue or sell any warrant, option, right, contract, call, or other security
instrument granting the holder thereof, the right to acquire Common Stock
without consideration or for a consideration less than such Common Stock’s bid
price value determined immediately prior to it’s issuance, (e)  incur
any additional secured debt or permit any subsidiary of the Company to incur any
additional secured debt without the Secured Party’s prior written consent unless
the security interest on such secured debt is junior to the security interest
held by the Secured Party, (f) be a party to any merger, consolidation or
corporate reorganization, (g) purchase or otherwise acquire all or
substantially all of the assets or stock of, or any partnership or joint venture
interest in, any other person, firm or entity, (e) sell, transfer, convey,
grant a security interest in (except for Permitted Liens) or lease all or any
substantial part of its assets, nor (h) create any new subsidiaries nor
convey any of its assets to any subsidiary.  Notwithstanding anything
to the contrary herein or in any other Transaction Document, the Company shall
be permitted to issue up to seventy five thousand dollars ($75,000) worth of
Common Stock per year as compensation to key employees.

       

      
        	
                Section
      7.4.

              	
                Management,
      Ownership.

              


      

       

      The
Company shall not materially change its ownership, executive staff or management
without the prior written consent of the Secured Party.  The
ownership, executive staff and management of the Company are material factors in
the Secured Party's willingness to institute and maintain a lending relationship
with the Company.

       

      
        	
                Section
      7.5.

              	
                Dividends,
      Etc.

              


      

       

      The
Company shall not declare or pay any dividend of any kind, in cash or in
property, on any class of its capital stock, nor purchase, redeem, retire or
otherwise acquire for value any shares of such stock, nor make any distribution
of any kind in respect thereof, nor make any return of capital to shareholders,
nor make any payments in respect of any pension, profit sharing, retirement,
stock option, stock bonus, incentive compensation or similar plan (except as
required or permitted hereunder), without the prior written consent of the
Secured Party.

       

      
        	
                Section
      7.6.

              	
                Guaranties;
      Loans.

              


      

       

      Other
than in the ordinary course of business, and except for such guarantees or
liabilities as are outstanding on the date of this Agreement, the Company shall
not guarantee nor be liable in any manner, whether directly or indirectly, or
become contingently liable after the date of this Agreement in connection with
the obligations or indebtedness of any person or persons, except for (i) the
indebtedness currently secured by the liens identified on the Pledged Property
identified on Exhibit A hereto and (ii) the endorsement of negotiable
instruments payable to the Company for deposit or collection in the ordinary
course of business.  The Company shall not make any loan, advance or
extension of credit to any person other than in the normal course of its
business.

       

      
        	
                Section
      7.7.

              	
                Debt.

              


      

       

      Other
than in the ordinary course of business, and except for such indebtedness as is
outstanding on the date of this Agreement, without the prior written approval of
Secured Party, the Company shall not create, incur, assume or suffer to exist
any additional indebtedness of any description whatsoever in an aggregate amount
in excess of $50,000 (excluding any indebtedness of the Company to the Secured
Party, indebtedness otherwise permitted by the terms of this Agreement, trade
accounts payable and accrued expenses incurred in the ordinary course of
business and the endorsement of negotiable instruments payable to the Company,
respectively for deposit or collection in the ordinary course of
business).

       

      
        	
                Section
      7.8.

              	
                Conduct of
      Business.

              


      

       

      The
Company will continue to engage in a business of the general type as conducted
by it on the date of this Agreement.

       

      
        	
                Section
      7.9.

              	
                Places of
      Business.

              


      

       

      The
location of the Company’s chief place of business is at the address set forth in
Section 8.1 hereof.  The Company shall not change the location of its
chief place of business, chief executive office or any place of business
disclosed to the Secured Party or move any of the Pledged Property from its
current location without thirty (30) days' prior written notice to the Secured
Party in each instance.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      ARTICLE
8.

       

      MISCELLANEOUS

       

      
        	
                Section
      8.1.

              	
                Notices.

              


      

       

      All
notices or other communications required or permitted to be given pursuant to
this Agreement shall be in writing and shall be considered as duly given
on:  (a) the date of delivery, if delivered in person, by
nationally recognized overnight delivery service or
(b) five (5) days after mailing if mailed from within the
continental United States by certified mail, return receipt requested to the
party entitled to receive the same:

       

      
        	 
      	
                If
      to the Secured Party:

              	
                Trafalgar
      Capital Specialized Investment Fund

              
	 
      	 
      	
                8-10
      Rue Mathias Hardt

              
	 
      	 
      	
                BP
      3023

              
	 
      	 
      	
                L-1030
      Luxembourg

              
	 
      	 
      	
                Attention:
      Andrew Garai, Chairman of the Board of

              
	 
      	 
      	
                Trafalgar
      Capital Sarl, General Partner

              
	 
      	 
      	
                Facsimile:         011-44-207-405-0161
      and

                                        001-786-323-1651

              
	 
      	 
      	 
      
	 
      	
                With
      a copy to:

              	
                James
      G. Dodrill II, P.A.

              
	 
      	 
      	
                5800
      Hamilton Way

              
	 
      	 
      	
                Boca
      Raton, FL  33496

              
	 
      	 
      	
                Attention:                                James
      Dodrill, Esq.

              
	 
      	 
      	
                Telephone:                               (561)
      862-0529

              
	 
      	 
      	
                Facsimile:                                (561)
      892-7787

              
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
                And
      if to the Company:

              	
                Environment
      Ecology Holding Co. of China

              
	 
      	 
      	
                391
      Hun Yu Lane, Dong Xin Street

              
	 
      	 
      	
                Xi’an
      Shaanxi Province, P.R. China

              
	 
      	 
      	
                Attention:  Mr.
      Liu Sheng Li, President

              
	 
      	 
      	
                Telephone:

              
	 
      	 
      	
                Facsimile:

              
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	
                With
      a copy to:

              	
                JPF
      Securities Law, LLC

              
	 
      	 
      	
                17111
      Kenton Drive, Suite 100B

              
	 
      	 
      	
                Cornelius,
      NC 28031

              
	 
      	 
      	
                Attention:  Jared
      P. Febbroriello, Esq. LLM

              
	 
      	 
      	
                Telephone:
      (704) 897-8334

              
	 
      	 
      	
                Facsimile:  (888)
      606-5705

              
	 
      	 
      	 
      


      

      


      Any party
may change its address by giving notice to the other party stating its new
address.  Commencing on the tenth (10th) day
after the giving of such notice, such newly designated address shall be such
party’s address for the purpose of all notices or other communications required
or permitted to be given pursuant to this Agreement.

       

      
        	
                Section
      8.2.

              	
                Severability.

              


      

       

      If any
provision of this Agreement shall be held invalid or unenforceable, such
invalidity or unenforceability shall attach only to such provision and shall not
in any manner affect or render invalid or unenforceable any other severable
provision of this Agreement, and this Agreement shall be carried out as if any
such invalid or unenforceable provision were not contained herein.

       

      
        	
                Section
      8.3.

              	
                Expenses.

              


      

       

      In the
event of an Event of Default, the Company will pay to the Secured Party the
amount of any and all reasonable expenses, including the reasonable fees and
expenses of its counsel, which the Secured Party may incur in connection
with:  (i) the custody or preservation of, or the sale,
collection from, or other realization upon, any of the Pledged Property;
(ii) the exercise or enforcement of any of the rights of the Secured Party
hereunder or (iii) the failure by the Company to perform or observe any of
the provisions hereof.

       

      
        	
                Section
      8.4.

              	
                Waivers, Amendments,
      Etc.

              


      

       

      The
Secured Party’s delay or failure at any time or times hereafter to require
strict performance by Company of any undertakings, agreements or covenants shall
not waiver, affect, or diminish any right of the Secured Party under this
Agreement to demand strict compliance and performance herewith.  Any
waiver by the Secured Party of any Event of Default shall not waive or affect
any other Event of Default, whether such Event of Default is prior or subsequent
thereto and whether of the same or a different type.  None of the
undertakings, agreements and covenants of the Company contained in this
Agreement, and no Event of Default, shall be deemed to have been waived by the
Secured Party, nor may this Agreement be amended, changed or modified, unless
such waiver, amendment, change or modification is evidenced by an instrument in
writing specifying such waiver, amendment, change or modification and signed by
the Secured Party.

       

      
        	
                Section
      8.5.

              	
                Continuing Security
      Interest.

              


      

       

      This
Agreement shall create a continuing security interest in the Pledged Property
and shall: (i) remain in full force and effect until payment in full of the
Obligations (whether by payment of cash, redemption or conversion); and
(ii) be binding upon the Company and its successors and heirs and
(iii) inure to the benefit of the Secured Party and its successors and
assigns.  Upon the payment or satisfaction in full of the Obligations,
the Company shall be entitled to the return, at its expense, of such of the
Pledged Property as shall not have been sold in accordance with Section 5.2
hereof or otherwise applied pursuant to the terms hereof. Upon payment in full
of all Obligations, the Secured Party shall execute and deliver to the Company
all instruments and other documents as may be necessary or proper to release the
lien on and security interest in the Pledged Property which has been granted
hereunder.

       

      
        	
                Section
      8.6.

              	
                Independent
      Representation.

              


      

       

      Each
party hereto acknowledges and agrees that it has received or has had the
opportunity to receive independent legal counsel of its own choice and that it
has been sufficiently apprised of its rights and responsibilities with regard to
the substance of this Agreement.

       

      
        	
                Section
      8.7.

              	
                Applicable
      Law:  Jurisdiction.

              


      

       

      This
Agreement shall be governed by and interpreted in accordance with the laws of
the State of Florida without regard to the principles of conflict of
laws.  The parties further agree that any action between them shall be
heard in Florida and expressly consent to the jurisdiction and venue of the
Florida State Court sitting in Broward County, Florida or the United States
District Court for the Southern District of Florida, for the adjudication of any
civil action asserted pursuant to this Paragraph.

       

      
        	
                Section
      8.8.

              	
                Waiver of Jury
      Trial.

              


      

       

      AS A
FURTHER INDUCEMENT FOR THE SECURED PARTY TO ENTER INTO THIS AGREEMENT AND TO
MAKE THE FINANCIAL ACCOMMODATIONS TO THE COMPANY, THE COMPANY HEREBY WAIVES ANY
RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING RELATED IN ANY WAY TO THIS
AGREEMENT AND/OR ANY AND ALL OTHER DOCUMENTS RELATED TO THIS
TRANSACTION.

       

      
        	
                Section
      8.9.

              	
                Entire
      Agreement.

              


      

       

      This
Agreement constitutes the entire agreement among the parties and supersedes any
prior agreement or understanding among them with respect to the subject matter
hereof.

       

      Section
8.10                                Further
Assurances.

       

      The
Company shall do and perform, or cause to be done and performed, all such
further acts and things, and shall execute and deliver all such other
agreements, certificates, instruments and documents, as the Secured Party may
reasonably request in order to carry out the intent and accomplish the purposes
of   Furthermore, the Company agrees to execute such other
documents as are reasonably required by the Secured Party.  It shall
be deemed a default of this Agreement if the Company fails to sign any such
agreement within one business day of the date of request by Secured
Party.

       

      
        
          
          

        

        
          
          

          
            

          

        

        
          
          

        

      

       

      [REMAINDER
OF PAGE INTENTIONALLY LEFT BLANK]

      


       

      IN WITNESS WHEREOF, the
parties hereto have executed this Security Agreement as of the date first above
written.

       

      


      
        	 
      	
                COMPANY:

              
	 
      	
                ENVIRONMENT
      ECOLOGY HOLDING CO. OF CHINA

              
	 
      	 
      
	 
      	
                By:                                                                

              
	 
      	
                Name:       Liu
      Sheng Li

              
	 
      	
                Title:         
      President

              
	 
      	 
      
	 
      	 
      
	 
      	
                SECURED
      PARTY:

              
	 
      	
                TRAFALGAR
      CAPITAL SPECIALIZED

              
	 
      	
                INVESTMENT
      FUND, LUXEMBOURG

              
	 
      	
                By:           Trafalgar
      Capital Sarl

              
	 
      	
                Its:           General
      Partner

              
	 
      	 
      
	 
      	
                By:                                                                

              
	 
      	
                Name:                      

              
	 
      	
                Title:          Portfolio
      Manager

              


      

       

      
        

      

       

      EXHIBIT
A

       

      DEFINITION OF PLEDGED
PROPERTY

       

       

      For the
purpose of securing prompt and complete payment and performance by the Company
of all of the Obligations, the Company unconditionally and irrevocably hereby
grants to the Secured Party a continuing security interest in and to, and lien
upon, all of the Company’s and its current or future acquired subsidiaries’
assets, including specifically the following Pledged Property of the Company and
its current or future acquired subsidiaries:

       

       

      (a)           all
goods of the Company, including, without limitation, machinery, equipment,
furniture, furnishings, fixtures, signs, lights, tools, parts, supplies and
motor vehicles of every kind and description, now or hereafter owned by the
Company or in which the Company may have or may hereafter acquire any interest,
and all replacements, additions, accessions, substitutions and proceeds thereof,
arising from the sale or disposition thereof, and where applicable, the proceeds
of insurance and of any tort claims involving any of the foregoing;

       

      (b)           all
inventory of the Company, including, but not limited to, all goods, wares,
merchandise, parts, supplies, finished products, other tangible personal
property, including such inventory as is temporarily out of Company’s custody or
possession and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any of
the foregoing;

       

      (c)           all
contract rights and general intangibles of the Company, including, without
limitation, goodwill, trademarks, trade styles, trade names, leasehold
interests, partnership or joint venture interests, patents and patent
applications, copyrights, deposit accounts whether now owned or hereafter
created;

       

      (d)           all
documents, warehouse receipts, instruments and chattel paper of the Company
whether now owned or hereafter created;

       

      (e)           all
accounts and other receivables, instruments or other forms of obligations and
rights to payment of the Company, including specifically an assignment of the
receivables from ABB (herein collectively referred to as “Accounts”), together
with the proceeds thereof, all goods represented by such Accounts and all such
goods that may be returned by the Company’s customers, and all proceeds of any
insurance thereon, and all guarantees, securities and liens which the Company
may hold for the payment of any such Accounts including, without limitation, all
rights of stoppage in transit, replevin and reclamation and as an unpaid vendor
and/or lienor, all of which the Company represents and warrants will be bona
fide and existing obligations of its respective customers, arising out of the
sale of goods by the Company in the ordinary course of business;

       

      (f)           to
the extent assignable, all of the Company’s rights under all present and future
authorizations, permits, licenses and franchises issued or granted in connection
with the operations of any of its facilities;

       

      (g)           all
products and proceeds (including, without limitation, insurance proceeds) from
the above-described Pledged Property; and

       

      (h)           all
equity interests, securities or other instruments in other companies, including,
without limitation, any subsidiaries, investments or other entities (whether or
not controlled).